Agenda and minutes

The Democratic Services Officer read out the procedure.

Apologies were received from Cheryl Kirby, Steve Paines and Wendy Weston.

At this point in the meeting declarations of interest are received from Members in any of the agenda items under consideration at the meeting. Members are asked to complete the green interest forms circulated to groups in their pre-meetings (which will be announced at the Council Meeting) to indicate:

(a) The agenda item number in which they have an interest to declare.

(b) The nature of their interest.

(c) Whether their interest is a disclosable pecuniary interest or an other interest,  (as defined in Part 2, A and B of the Code of Conduct and Rules for Registration of Interests)

Any Member who needs to clarify any matters relating to the declaration of interests is recommended to seek advice from the Council’s Monitoring Officer or a member of his staff before the meeting to expedite dealing with the item during the meeting.

There were none.

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A Member drew attention to a formatting problem at the bottom of page 4 of the minutes resulting in ‘RESOLVED’ and the list of items resolved being split between pages.

The minutes were otherwise approved as a correct record and signed by the Chair.

The Investment Manager presented the report.

Pooling of Investments

She drew attention to the DCLG’s criteria and guidance document, which was attached as Appendix 4 to the report (agenda page 71). The key criteria were listed in paragraph 4.4 of the covering report. She drew attention to the criteria that pooling proposals must demonstrate reduced costs with no deterioration in investment performance, and that pools should improve the capacity to invest in infrastructure.

There were very tight deadlines for the next stages of the process as detailed in paragraph 4.4(b) of the covering report.  An outline proposal has to be submitted by 19 February next year and a detailed proposal by 15 July 2016. The Government will examine whether initial pooling proposals are likely to meet their objectives and, if necessary, will have “conversations” with funds.

The SW group of funds is the most advanced on progress to pooling. They had commenced a joint project in August 2015 following the Chancellor’s announcement in July. The SW group is looking for additional partners, including funds outside the Southwest, and has changed its name to Project Brunel. Oxfordshire Pension Fund had recently decided to join the group. It is expected that the £25bn pooled investment target will be achieved.

She suggested that it was important that the Government had set a baseline for cost savings and that this recognised that significant savings had already been achieved through framework agreements and changes to procurement, for example.

A meeting had been arranged in January 2016 for the Chairs and Vice-Chairs and Section 151 Officers of all the funds at which the business case would be discussed. All the relevant Councils/funds would have to decide on whether to accept the pooling proposal in principle by 5 February. This would leave two weeks for any remaining details to be settled before the 19 February deadline. Because of this timescale it was proposed that the power to approve any proposals or expenditure relating to the project be delegated to a working party, with an opportunity for all Members to comment.

The Committee then debated a number of issues including the

-  The appropriateness or not of a geographical grouping

-  Ability to invest in local infrastructure

-  The apparent lack of joined-up thinking in Government that could lead to projected costs savings from pooling being negated by MIFID II.

The Head of Business, Finance and Pensions responded that there was a history of co-operation between the funds in the Southwest, which made it easy for them to work together on pooling. Elsewhere large funds were establishing joint arrangements with smaller funds in other areas, like the London fund working with the Lancashire fund. In many cases geographical factors were not the main drivers. The Investment Manager added that shared values were important, and this would be made clear to potential new partners.

A Member said that having recently attended a recent LAPFF meeting, he was aware that civil servants recognised the difficulties in the way of co-operation  ...  view the full minutes text for item 45.

The Investment Manager presented the report.

She said that the Markets in Financial Instruments Directive (MIFID II) is an EU Directive, which was due to come into force from 1 January 2017. This directive classifies LGPS funds as retail not professional clients. An announcement that its implementation would be delayed until 2018 is anticipated. This would allow further time for its impact to be assessed. Investment managers would have to monitor compliance and would need to set up complex systems to do this. There was a risk was that some managers might not want to manage retail funds.  In addition, MIFID II might make pooling of assets and investment in infrastructure more difficult for LGPS funds.

A Member asked whether it was possible to make a representation asking for LGPS schemes to be exempted from this Directive, which did not apply to private pension schemes. She also noted the statement in the report that LGPS funds were not separate entities from the local authorities and that this may be reviewed. The Investment Manager replied that there was discussions about the possibility of separating LGPS funds from their administering authorities, and that the implications of this Directive might feed into that. The LGPS Scheme Advisory Board was supposed to be doing work on this, but it was on hold because of delays in appointments to the Board. The LGA was in discussions about an exemption for LGPS funds with the FCA (responsible for MIFID II in UK).

A Member asked whether any work was being done in relation to the Avon Fund opting for professional status. The Investment Manager said this was not possible until the Government clarified the criteria.  The fund was in discussions with managers. Most of the Fund’s managers probably would regard us as a professional investor, but evidence of that would have to be presented. It was hoped that discussions between Government and the LGA would result in a relatively straightforward process for LGPS funds to opt for professional status.

RESOLVED to note the potential impact of MIFID II on the Fund and the actions being taken to manage the risk to the Fund’s investment portfolio.

The Investment Manager presented the report, which summarised the information given to the Committee at the workshop in October. She reminded Members that there had been a great deal of discussion at the workshop about the appropriate discount rate to use in the next valuation. The actuary was concerned that if gilt yields were again used to calculate this, too much prudence would be built into the funding strategy, resulting in higher than necessary contributions from employers. However, whatever the base used to calculate the discount rate, the same level of prudence would be sought as at the last valuation. Because this would the first experience of a valuation for many Members of the Committee, it was proposed that there should be a workshop in March to explain the principles of the Funding Strategy Statement (FSS). A draft FSS would be put before the Committee at the June meeting and would then be sent to employers for consultation. The final FSS would be approved by the Committee at the September meeting.

In reply to a question from a Member, the Investment Management clarified that calculation of the discount rate by the real expected asset return above the CPI baseline assumption was the current recommendation from the actuary, and might change in accordance with the circumstances prevailing at the time of the valuation.

RESOLVED to note the information set out in the report including the timetable for the 2016 valuation.

The Assistant Investments Manager presented the report.

Liability Management

He reminded Members that the aim was to put a framework in place to manage the mismatch between the changes in the value of assets and liabilities over time, thus allowing the Fund to minimise funding level volatility and stabilise employer contribution rates more effectively. In June the Committee had requested the Panel reviewed the range of investment options available to more effectively manage liability risks, how they could be implemented and the cost. The Panel had taken two decisions as noted at 4.2 a) and 4.2 b). The interim step recommended in 4.2 a) would be beneficial irrespective of whether the full proposal was eventually implemented, and would not reduce the expected return on assets.

Rebalancing policy

The policy of the Fund is to rebalance the portfolio back to the target allocations after market movements cause allocations to vary by a certain amount. Rebalancing is important because it ensures that the Fund is invested in accordance with strategic asset allocations. It can also add value over time as it forces selling of relatively expensive assets and the purchasing of relatively cheaper assets. The Committee was invited to agree the recommended changes to the rebalancing policy as set out in 4.3 a) of the report.

A Member expressed concern about the potential for overtrading. He was unable to find information in the papers about how often illiquid assets would be rebalanced. The Investments Manager referred to line 7 of the table on page 171 of the agenda. Mr Turner said that he did not think overtrading would take place; he considered that the proposed new policy would establish a much clearer framework for decision making. The Member requested that the Investment Panel should monitor trading frequency. Mr Turner suggested that the main issue would be ensuring that the Fund was close to the target allocation of some asset classes, which depended on the draw-down period and whether the manager had called on all the capital that the Fund had committed. The Fund might also find that it was below a target allocation, because the value of other assets had risen, in which case it would a question of catching up, rather than rebalancing back.

The Investments Manager said that it was proposed that a workshop on the funding strategy should be combined with a workshop on the concept of liability-driven investment (LDI), after which Mercer would draft a framework to be considered by the Panel before it came to Committee. The LDI strategy should be considered as part of the valuation debate.

RESOLVED:

1. To agree the recommendation to increase the benchmark allocation and allocation range to index-linked gilts as at paragraph 4.2 a) of the report, to better match liabilities.

2. To note the decision by the Panel to prepare a framework to more effectively use the investment assets to match the liabilities, as set out in paragraph 4.2 b) of the report.

3. (insertion authorised by the Committee, as reported in  ...  view the full minutes text for item 48.

The Assistant Investments Manager presented the report. Over the quarter the funding level had decreased by 4%, because the value of the assets had fallen and a fall in the discount rate had increased the liabilities. Over the year since September 2014 the funding level had fallen from 83% to 72%, primarily because of the fall in gilt yields increasing the value of the liabilities. These figures were based on the 2013 valuation level, so are different to those given in the interim valuation report. The asset portfolio had underperformed the returns required by the Funding Strategy over the year, but returns were in was in line with the Strategy over three years. He invited the Committee to approve the revised Statement of Investment Principles (Appendix 4 of the report). The minor changes in the revised Statement reflected changes in the hedge funds and currency hedging mandates agreed by the Committee.

Mr Turner commented on the Mercer investment report. He said that market conditions had been difficult, with a general flight from risky assets, such as equities, into more secure assets, such as gilts. This had caused the “double-whammy” of a fall in the value of assets and an increase in the value of the liabilities. It was likely that US interest rates would rise next week, the first increase in ten years. This would the opposite of what most countries were doing. It was not clear how markets would respond to the rise. It might make it difficult for the Fund’s managers to continue to generate the level of outperformance they had achieved over the last 4-5 years. He drew attention the table of manager performance on agenda page 219. The relative performance of Jupiter appeared good, but the asset class in which they invested had fallen further than some others. Pyrford and Standard Life, despite their negative returns in the quarter, were playing the role they were expected to in the strategy. Mercer would introduce changes to this table to give a more informative picture of performance.

In response to a question from a Member he said that in the buoyant equity markets of the past view years it had been relatively to generate good returns. In the future, managers like Pyrford, who had an unconstrained approach, would be increasingly useful in navigating market volatility.

The Independent Investment Adviser suggested that the performance table was misleading because Pyrford and Standard Life had relatively high cash-based benchmarks. Mr Turner agreed this was the case.

A Member referred to the Government’s wish that funds should focus on returns in the long term rather than the short time, and suggested that a lack of monitoring in the short term might result in an unpleasant surprise in the long term. Mr Turner said he agreed, but he thought the Government was trying to lessen the burden on administering authorities by reducing the amount of detail they had to consider. The Investment Manager said that the Government was worried that a focus on  ...  view the full minutes text for item 49.

The Finance and Systems Manager (Pensions) presented the report.

He said that the finance and administration reports had now been separated to permit a clearer focus on each aspect.

Directly-controlled administration budget expenditure was forecast to be £50,000 below budget. This resulted from the delay in appointing staff to assist in the GMP data reconciliation project, the delay in appointing a Custody & Finance Officer and savings on communication costs. In the part of the budget not directly controlled, expenditure was forecast to be under budget by £793,000, because investment manager fees were below the level assumed when the budget was prepared. The forecast net outflow of cash was £16m, compared with £24m forecast in the Service Plan 2015/16. The reasons for this were set out in paragraph 5.2 of the report.

A Member asked whether the termination deficit payment referred to in 5.2 was actually a cash inflow rather than an employer’s secure bond. The Investment Manager confirmed that it was.

RESOLVED to note:

1. The administration and management expenditure incurred for 7 months to 31 October 2015.

2. The cash flow forecast to 31 March 2016.

The Pensions Benefit Manager presented the report.

He said this was the first combined administration performance and Data Improvement Plan report (the latter being introduced as a requirement following the introduction of The Pension Regulator Code of Practice 14).

Performance

There were no significant issues to report. The Balanced Scorecard showed that the key performance indicators were all within or near target. However, there was a slight underperformance on the processing of early leaver cases, mainly due to the increased workload in this area following the year-ending data cleansing exercise. There had been a further increase overall in work cases during the reporting period, attributable mainly to data reconciliation and a build-up of aggregation cases.

The Avon Pension Fund also administers the Firefighters Pension Schemes on behalf of Avon Fire and Rescue Service. Recent developments relating to the Fire scheme had significantly impacted on workload:

• the scheme had become a CARE-based scheme in April 2015; much staff time was dedicated to implementing the new scheme and providing training events.

• Retained firefighters had been granted access to the scheme on an historic basis.  The Fund provided training to Fire Authority HR and Finance staff and detailed calculations on admission of qualified members.

• The Ombudsman had made a decision in the case of Milne v. GAD in favour of Milne. As a result additional payments would have to be made to certain Firefighter scheme leavers whose pensions had commenced between in the period between December 2001 and August 2006. Payments in these cases would total about £2.2m and would be made within the next two months.  All payments will be funded by Fire Authority.

• DCLG had also advised that firefighters who had joined the old Firefighters Pension Scheme before the age of 20 and had 30 years of service would be allowed to take a contributions holiday from the age of 48 up to the age of 50.  Further details on this are awaited from DCLG.

There was a requirement to issue an Annual Benefit Statement to all members by 31^st August. Only 105 statements were not issued by this deadline, and this was because nine employers failed to provide any year-end information at all. Penalties charges would be imposed on employers who failed to meet the advertised criteria for correct and timely supply of data at year end. It was vital now the LGPS scheme was no longer a final salary scheme that current data was held for each member. He drew attention to the table of TPR Improvement Plan Data in Appendix 8 on agenda page 277; there was an increase in the number of leavers being identified. Additional efforts would be made to engage with and train employers. Officers would visit employers, because in general those employers attracting penalty charges  were not interested in attending training workshops or conferences. Continuing refinement of the performance reports would allow problem employers to be targeted.

A Member asked whether it was possible to estimate the additional costs being imposed by new  ...  view the full minutes text for item 51.

The Pensions Benefit Manager presented the report. He said that the revised procedure reflected the new LGPS regulations and took into account guidance received from The Pensions Regulator as set out in its Code of Practice 14. He invited the Committee to approve the revised procedure.

A Member said that she thought two months before a response was sent was too long. She also thought it was not clear who was involved at Stage 2. The Pensions Benefit Manager replied that most cases would be dealt with by the employer, which is Stage 1. At Stage 2 cases are dealt with by the Fund.  The attached appendix to the report outlines the responsibility at each stage of the process.

RESOLVED to approve the Internal Disputes Resolution Procedure as outlined in the report.

The Investments Manager presented the report. She reminded that Members’ attendance at training events was reported in the Annual Report and Accounts and in the Annual Report to Council. Members had been invited to undergo training to meet the requirements of the CIPFA Knowledge and Skills Toolkit within their first year on the Committee.

RESOLVED to note the workplans and training programme for the relevant periods.